China Venture Capital Lures Investors Back as Fundraising Rises

Investors are plowing capital back into China’s venture capital firms after shunning them for most of last year as they struggled to exit companies amid lackluster initial public offerings.

But with IPOs back on track, venture fundraising in China has turned more positive. Firms raised $1.07 billion in the first quarter, marking a 35% increase on the same period a year earlier, according to Dow Jones VentureSource, a data provider owned by VentureWire publisher Dow Jones & Co.

However, only six firms managed to close new funds in the first three months of the year, a meager number compared to previous quarters.

Investors are turning more selective in allocating capital, having been scarred by last year’s slower distributions as China-focused fund managers contended with fewer IPOs, both at home and abroad.

China-focused venture firms have traditionally relied on IPOs as their main exit path rather than trade or secondary sales given an expectation of higher returns. But an IPO-bias put general partners in a quandary after the Chinese government paused domestic IPOs last year as it sought to reform the public listing process.

Looking to reduce any future slowdown in distributions, limited partners have turned to the comfort of a handful of fund managers that have a track record of making returns. Shanghai-based Qiming Venture Partners was one of those firms, closing a $500 million fourth-dollar vehicle in the first three months of the year, while DCM closed its seventh vehicle at $330 million.

“Things are getting a bit warmer in China’s venture sector as the IPO markets are open again. Investors now have a sense of confidence that there’s a pretty reliable form of exit, and it’s encouraging that we’re seeing more U.S. listings,” said Hubert Tse, a partner at Chinese law firm Boss & Young who advises global and Chinese venture capital and private equity firms.

China venture-backed companies raised $2.1 billion via public offerings either at home or abroad in the three-month period starting in January, relative to no IPOs in the same period a year earlier, and $1.6 billion in the first quarter of 2012, VentureSource figures previously showed.

All eyes are on Chinese Internet giant Alibaba Group ‘s U.S. IPO, which is set to be the biggest U.S. offering since that of Facebook Inc. Market watchers say if Alibaba’s offering is a success then this will likely boost valuations of private businesses in the Internet sector.

Other sectors that will prove rich pickings to venture capital firms include the finance, consumption and biotechnology sectors, pointed out Mr. Tse, noting that the government is either injecting its own money or encouraging other investment into these industries as it seeks to rebalance the economy.

The first quarter’s $1.07 billion fundraising was the largest amount secured since the fourth quarter 2012 when $1.08 billion was raised via 15 fund managers.

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